A condominium can offer a great gateway into homeownership without all the responsibilities of a single-family home that can be a strain on the household budget, but there are a few things to keep in mind before you look into purchasing a condo. Most condos charge a fee for upkeep that is handled by the condo association. Even with this fee, most condos are cheaper than houses, but there’s a lot to remember before you buy.
It has almost become a trope at this point that condo associations can be populated with petty people. You should seriously think about whether you want to live in the building with everyone in the association. Purchasing a condo is like signing a business agreement with everyone who owns space in the building. You should understand how the place is managed and talk to current tenants. Listen to any of their grievances about how the condo association has handled problems that have arisen. That will give you a good idea of how the association deals with problems in the building.
You can always ask to have a copy of the condo association budget before you make your purchase. The association probably won’t want to give you a copy as a prospective buyer, but you can ask the seller to provide you with their copy. A condo association’s budget will tell you the outstanding amount of debt owed and the percentage of owners not paying their dues. This is important because financers like Fannie Mae, Freddie Mac, and the FHA will not approve mortgages for condos in a building with more than 15% delinquency rates.
It’s important for prospective buyers to know the current condo’s delinquency rates to determine the health of the purchase. As previously mentioned, several finance companies do not offer mortgages in buildings with a 15% delinquency rate. This can make it hard for a prospective buyer to get a loan to purchase the condo, but it can also make it hard for a seller to get out of the property. If you purchase a condo and ever need to refinance, you could struggle with that, too.
Condo Cash Reserves
Peeking at the condo budget will also give you a good idea of the cash reserves on hand for taking care of problems as they arise. Lower cash reserves mean a condo association may enact special assessment fees to try and boost income. The FHA and Fannie & Freddie require condos to set aside 10% of their annual revenue for emergencies and expenditures, but many don’t. It’s estimated that around 80% of condos do not have cash reserves to cover an emergency.
Most condo owners want to close the deal in cash, which means there aren’t very many financing options for condos. Investors rather than true owners often hold condos in large cities like Las Vegas, Miami, and New York. The FHA will not approve mortgages where more than 49% of the owners in the association are investors. These condos sold at cash price are often heavily sold at discounted prices.